State lawmakers face the potential of a significant budget shortfall next year and lengthy recovery that some worry could return Oklahoma to its recent era of cuts that saw schools, hospitals and law enforcement agencies make drastic moves to reduce spending.
The double hit of a coronavirus-caused economic downturn and a slumping energy sector paints a grim picture for the Fiscal Year 2022 state budget, which will include new obligations to fund a state contribution to Medicaid expansion and possibly paying for COVID-19 tests and medical care if the federal government fails to deliver another stimulus package.
“We are headed into an incredibly difficult budget year,” said John Budd, the governor’s Chief Operating Officer. “The reality we face is a lot of (state) agencies will want more money but there will not be more money overall, that I’m sure about. What the exact number will be we don’t know right now.”
The state will receive a clearer budget picture in December and again in February as official estimates are determined by the state Board of Equalization, which sets the amounts the Legislature works off of.
Estimates vary but the optimistic view is that the funding gap will be a little less than this year’s $1.3 billion shortfall, which may have been a larger cut than necessary given some economic rebounds in recent months.
At best, a flat budget will still challenge lawmakers as the current fiscal year budget was partially propped up by one-time spending – money was diverted from transportation funds and state employee retirement contributions – that likely won’t be an option next year. The Legislature also relied heavily on the state’s savings account, which recently topped $1 billion but is now around $244 million.
Unlike past years of revenue declines, mostly tied to a slumping oil and gas sector, the current slide may be harder to predict an end to primarily because of the unknown timeline of the coronavirus that continues to wreak havoc on the economy.
Cases continue to spike in Oklahoma, putting pressure on local governments and business leaders to take steps that further harm the economy.
In preparation for next year’s budget deficit, Gov. Kevin Stitt has hired a consulting firm to help him analyze state spending and make recommendations for cuts and other structural changes.
The state used $325,000 in federal Coronavirus Relief Funds to hire Guidehouse Holding Corp., which is currently interviewing agency leaders and investigating state spending practices in order to provide a list of recommendations, according to a copy of the contract.
Budd said the agency was essentially tasked with finding an extra $1 billion, preferably through federal government programs the state is currently missing out on.
Recommendations could also include ways to consolidate spending or agency cuts, Budd said.
“The last resort to me is cutting core services, so the more creative ideas I can bring in to help us close that gap that don’t involve cutting core services the better,” Budd said.
Stitt’s budget proposal is just one part of a process that includes state agency requests and the state Legislature producing a budget for the governor’s approval.
House Majority Floor Leader Jon Echols said state agencies will see cuts, “there is no way around it.”
But Echols predicted more targeted reductions, rather than uniformed across the board cuts to all agencies, based on the historic preference of Rep. Kevin Wallace, the chair of the House Appropriations & Budget Committee.
Echols, R-Oklahoma City, also predicts a lack of interest in tax increases.
In addition to the governor’s own opposition to an increase in taxes, Echols said the recent success of Republicans in state elections sent a “pretty clear message, Oklahomans don’t want tax increases.”
But Democrats plan to raise the issue even with an 82 to 19 minority in the state House.
“I think we really have to ensure some fairness in our tax system,” said House Minority Leader Emily Virgin, who supports a higher income tax rate for higher earners.
Virgin, D-Norman, said the priority in 2021 will be protecting core services – education and health care chief among them.
But some budget observers believe the financial pain of next year isn’t likely to go away quickly, even if the pandemic begins to subside by spring.
“I would be more concerned about what happens after Fiscal Year 2022 than what happens in Fiscal Year 2022,” said Paul Shinn, the budget and tax senior policy analyst at the Oklahoma Policy Institute. “Regardless of the short term issues, we are in for a long recovery over the next five to 10 years.”
Like the Democratic caucus, the Oklahoma Policy Institute has advocated for tax increases and Shinn said it would be the best way to expedite the recovery.
While the current recession is different than the one 12 years ago, Shinn predicts the recovery will take nearly as long as the last one, at least for some segments of the economy.
“Our concern is that acceleration has completely different impacts at the top of the income scale and for larger businesses than it does for smaller businesses and middle- and lower-income people,” Shinn said. “The loss of income for a lot of low-income people is going to take a long long time to come back.”
Shinn predicts a long recovery for rental housing, retail and restaurants, based on estimates from the Congressional Budget Office’s 10 year economic projection.
But the slumping oil and gas sector could put a further drag on Oklahoma’s economy, especially since each oil recovery never seems to bring back the same number of jobs as before the downturn, Shinn said.
A significant rebound in oil drilling may not happen until 2022, according to Russell Evans, executive director of the Steven C. Agee Economic Research and Policy Institute.
In 2019, the number of active drilling rigs in Oklahoma declined by 61 percent, followed by another 75 percent reduction this year, according to the Petroleum Alliance of Oklahoma.
Complicating the budget process could be continued friction between the governor and state Legislature, which overrode Stitt’s vetos to finalize this year’s budget.
But the governor will head into the next legislative session with new faces at positions key to budget negotiations, including chief policy adviser Brian Bingman, the former leader of the state Senate.
“He understands the process to get things accomplished at the Capitol and will be a great resource for my administration and our state,” Stitt said in an August statement when Bingman’s hire was announced.
The governor also hopes a report from the Guidehouse consulting firm will provide some new sources of funding that will ease next year’s budget pain.
But even the consulting firm acknowledges cuts are likely.
“While the projected revenue losses for the next budget cycle can be supported, in part, by various fund reserves, the State will most likely require reduced service-level expenditure and cost-saving actions,” Guidehouse said in its initial bid for the consulting job.
Guidehouse also said it, “will provide the State of Oklahoma’s Chief Operating Officer a report outlining our recommendations for budget restructuring, highlighting actionable steps to implement the recommended changes, identifying necessary stakeholders that can champion these recommendations, and evaluating the ramifications to the budget and state credit rating in the immediate and long-term.
“This will include a series of budget modifications that may include cost-cutting, cost avoidance, or other recommendations that change how the State uses its budget in response to the shortfall created by the COVID-19 pandemic. We will do this judiciously, by considering the materiality of impacts on service levels to citizens.”
Virgin, the Democratic leader in the House, said she wasn’t aware of the governor’s consulting firm or its objective, but expressed skepticism in finding new efficiencies in the budget.
“We’ve been hearing for 10 years about finding efficiencies in the state budget and making sure we are spending money wisely but if the Republican party hasn’t found those efficiencies in 10 years I don’t think they are going to find them in the upcoming years,” Virgin said.
“It always scares me when I hear finding efficiencies because in many cases that involves cutting services. I think most state agencies are pretty much down to all of the efficiencies they can enact.”
Budd, the governor’s chief operating officer and a former consultant, said he hopes Guidehouse is able to find revenue opportunities that can only be found with this type of deep investigation into the state’s spending practices.
Budd also said the process will include looking at what opportunities other states are utilizing.
“I have to believe there are some things other states are doing better than we are doing,” Budd said. “Why not bring in some experts who can help us?”